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For Release on Delivery Ixpected at 10:00 a.m. (E.S.T.) Statement by Nancy H. Teeters Board of Governors of the Federal Reserve System before the Subcommittee on Consumer Affairs of the Committee on Banking, Finance, and Urban Affairs House of Representatives April 23, 1980 I am pleased to be here today to discuss H.R. 6928, the Cash Discount Act, and H.R. 7038, the Fair Credit Practices Act. I will first talk about the Cash Discount Act, which the Board supports. The Cash Discount Act would amend the Truth in Lending Act and permit merchants to offer unlimited discounts to encourage their customers to pay cash rather than with a credit card. bill is both timely and beneficial. The Board believes that the In view of the on-going consumer credit restraint program for combating inflation, encouraging merchants to offer their customers real incentives for paying in cash is a desirable goal. How ever, we believe this is desirable legislation also in more general terms. For example, to the extent that merchants are successful in persuading their customers to pay cash for smaller purchases, a desirable increase in the overall efficiency of credit card processing operations may result. As you know, the Truth in Lending Act currently establishes special rules for cash discounts. If the discount is 5% or less, and if it is made available to all customers, then the discount will not be considered a finance charge under either federal or state law. The Board has imple mented these provisions in Regulation Z. The bill would make two changes in existing law, other than remov ing the 5% limit on cash discounts. I would like to address each. First, the bill would eliminate the Board's Regulation Z definition of the "regular price" of merchandise. Since the Truth in Lending Act specifically defines both a "discount" and a "surcharge" by reference to a "regular price," the Board believed that it was necessary to make clear what that intermediate, benchmark price would be. For example, if the tagged price of a coat is $100, but a cash customer is only asked to pay $90 for the coat, is the $10 - 2 - difference a "discount" or a "surcharge"? The answer would depend on what the undefined, "regular price" of the coat was considered to be. the Board considered this problem. In 1977 Among the suggested ways of defining the "regular price" was "the price a merchant normally expects to receive with out taking into consideration the method of payment." The Board decided that such suggestions were not the best course to follow for two reasons. First, the cash discount provisions were meant to encourage, not mandate, a two-tier pricing program, and thus the simplest and most straightforward approach was thought to be desirable. Second, in view of the fact that "surcharges" are illegal, merchants may be reluctant to offer a dual pricing system without specific assurance of its lawfulness from either Congress or the Board. Under H.R. 6928, neither the Board nor its staff would be able to provide such assurance, because Section 3 of the bill would remove the Board's implement ing and interpretive authority on cash discounts. Consequently, the Board urges the Committee to consider adding a specific definition of "regular price" to the bill. The bill would also eliminate current requirements that a discount must be offered to all prospective customers, and that its availability must be clearly and conspicuously disclosed. Thus, it would be possible for merchants to make discretionary decisions about offering a discount on a customer-by-cu8tomer basis. For example, discounts might be made available only to persons who proffer a credit card. The Board is concerned about the fair and non-discriminatory treatment of all cash customers, and opposes the removal of the requirement to prominently display the availability to all of discounts for cash. - 3 - 1 would next like to talk about H.R. 7038, the Fair Credit Practices Act. That bill would prohibit creditors from imposing certain, adverse changes on outstanding balances in open-end consumer credit accounts. It would also require creditors to give 60 days advance notice of any change in account terms. The Board believes that the approach taken by the Fair Credit Practices Act, while intending to benefit consumers, may even have a greater adverse effect on consumers than the extreme approach of permitting all account term changes to apply to existing balances. The Board's decision, announced on April 2, is an intermediate approach based upon careful consid eration. Before implementing its change in terms requirements under the Credit Control Act, the Board was informed that many creditors could not apply changes only to new extensions of credit, and that many others could do so only at great expense and with a long lead time. To the extent that creditors find making changes difficult or impossible, they will seek other ways of responding to their higher costs of doing business. The strategies that they devise may be more onerous to consumers than- having a change in terms apply to outstanding account balances. For example, creditors may simply terminate accounts, or deny all applications for new accounts. The classes of people likely to be most affected by such severe action would probably be those whom the Equal Credit Opportunity Act was designed to protect— minorities, women, and the elderly. Creditors might also step up collection activities, and cancel cards for minor delinquencies. This action would fall most heavily on debtors who are showing signs of distress and would seem to have the most undesirable social consequences. - 4 - The Board believes it is vitally important to keep in perspective the effect of the types of account term changes planned by most creditors. Board staff has conducted an informal survey of the kinds of changes that creditors have been announcing since the credit restraint program went into effect. Whether because of market forces, or overriding long-term goals such as maintaining a customer base, these changes seem tempered and even constructive. Attached is a summary of media reports of creditors' reaction to the credit restraint program. review. Here are some examples drawn from this First Jersey National Corporation increased its minimum payment from 1/36th to l/30th of the outstanding balance. On a balance of $500, this would be an increase in payment of $3 per month. Several banks intend to impose charges for the card they issue ranging from $10 to $20 per year. Sears, Roebuck announced that it would increase its smallest minimum payment from $8 to $10. Persons with an outstanding balance of up to $500 would have their monthly payment increased $2, and persons owing more than $500 would have their payment increased from l/25th of the outstanding balance to l/23rd. This means that a person with an outstanding balance of $1,000, presumably a solid credit risk, would have his or her pay ment increased from $40 to $44 a month. Many states are increasing their allowable rate of finance charge on open-end consumer credit. It might be instructive to run through what an increase in rate means to the budget of a consumer. For example, an increase from 12 to 15 APR means a monthly increase of $1 to a person with a $500 out standing balance. An increase from 18 to 22 APR means an increase in monthly finance charges of $1.67 to a person with a $500 balance. It should be kept in mind, of course, that under the Board's regulation, changes affecting - 5 - existing balances may only occur if the consumer affirmatively agrees to the change, either in writing or by continued use of the account. In summary, the Board considered the approach taken in^H.R. 7038 and concluded that because of current market conditions with the credit restraint program in effect, both consumers and creditors would be seriously disserved by that approach. The Board strongly recommends that this Committee not approve the Fair Credit Practices Act. I will be happy to answer any questions you might have. CONSUMER I£NDING POLICY CHANGES IN REACTION TO CREDIT RESTRAINT PROGRAM OF MARCH 14 No. Date Source____________________________ Summary of Action_____________ ___ ___________ 1. 3-20 WSJ Penney curtailing its advertising to promote credit cards, except primarily in new stores. Sears will increase min. monthly payments on credit accounts, but undecided by how much. Current min. is $8 on smallest balances and $20 for balances of $500. Sears, with 23 million credit accounts, has card receivables of about $6 billion. First National Bk of Boston no longer accepting credit card application and has removed all loan applications and brochures from branch offices First Nat'l Bk of Louisville pulled its credit card application forms from retail stores. Must be depositor to get credit card. Cooney, Pres, of Charge Card Assoc., Detroit, processes MC and Visa cards for 280 banks. In past 2 weeks, transactions volume handled by his firm has dropped 40% from year earlier. First Pa. Bank, Phila's largest, cut max. line of credit on new Master Charge cards to $500; previous line was $5,000. Existing customers can only get a $200 increase in their credit limit. Mercantile Trust Co., St. Louis, dealing more promptly with delin quencies. Limiting credit to customers only. Mellon Bank, Pittsburgh, quit processing new MCharge and Visa applications. No longer extending credit lines for current card holders. Customers who formerly were allowed to go 10% over their credit limits won't be able to any more. First Jersey National Bank, Jersey City, new card holders must have been customers for at least a year. After-tax annual income require ment has been boosted. 2. 3-20 Amer. Banker Mellon Bank tightens qualifications for new MCharge applications. Need 3 years continuous employment and min. net monthly income of $1,000. Max. 20% increase in credit lines o f ’ cardholders. Last week, accepted 21% of applications; a year ago, about 60%. Pittsburgh National increased rate of repayment by calculating the min. monthly payment at 10% of outstanding balance rather than 5%. Equibank, in Pittsburgh, tightens its qualifications for card issuance, adopted 3-year on-the-job standard, set a max. of 48% of income that cannot be assigned debt, and established $600 credit limit. Lloyds Bank of Calif, put 30-day moritorium on issuing new Visa and MC credit cards, effective March 19. - 2- CONSUMER LENDING POLICY CHANCES IN REACTION TO CREDIT RESTRAINT PROGRAM OF MARCH 14 •No. 3. Date Source 3-20 Wash. Post ___________________ Summary of Action_______________________________ Penney raises min. purchase on time payments to $200 from $19. Also raises score to qualify for a credit card. Will limit solicitations for new cards to new stores. Wells Fargo freezes credit limits for its 1.3 million Master Charge card and Visa customers. Chase Manhattan no longer accepting applications for unsecured consumer credit. 4. 3-21 WSJ Bankers Trust Co., New York, is limiting to $500 the line of credit it • will grant on new credit cards and is freezing existing cards at current credit limits. 5. 3-24 WSJ First Nat'l Bank of Chicago's 2.9 million Visa card holders will pay an annual fee of $20 on cards effective July 1. The minimum repayment rate will rise to 5% a month from 4%. 6. 3-24 U.S. Nat'l Bank, Portoland, Oregon, raised minimum roonthly payments on Visa cards from lesser of $10 or 5% of the outstanding balance to $30 or 7% of balance. Amer Bnkr Chemical Bank, New York, no longer issuing Visa, M Card, or Am. Exp. gold cards to any customers who already have any kind of revolving credit, cards, or other lines. Present credit lines will not be increased. Applications for cards and lines from Chemical customers with checking or savings accounts for more than three months will still be accepted. Chemical will accept applications for installment loans from customers with 3-month checking or savings relationships, but minimum unsecured loan be $2,000. Ameritrust Co., Cleveland, and Bank.One of Columbus, Ohio, halt issuance of credit cards to noncustomers. Ameritrust lowered credit lines on new cards from $1,500 to $500, & tightened its debt-to-income ratio of new applicants. Visa applicant must have six-month savings or checking account relationship to qualify for cards. Ameritrust also scrutinizing delinquent accounts 30 days past due; formerly 60 days. Bank One halted the 10% override on card limits, and lowered average lines from $750 to $600. 7. 3-25 WSJ, NYT, Post Citibank will sharply curtail student loans, mobile home, and home improvement loans, limit the amount that cash customers can get with credit cards, and raise monthly payments from $5 to $15 on credit card payments. The bank has stopped issuing new MasterCard and Visa Credit cards. The bank is curtailing overdrafts on Beady Credit and CheckingPlus accounts of customers who have not had both checking and savings accounts for at least six months. -3CONSUMER LENDING POLICY CHANGES IN REACTION TO CREDIT RESTRAINT PROGRAM OF MARCH 14 No. 8. Date 3-25 Source_____________ _____________ Summary of Action___________________________ NYT Southeast Banking Corp. in Miami will start charging Visa and Master Card holders $18 annual membership fees next month. They also are cancelling credit card lines for nondepositors who have moved out of Florida and will only issue new cards to deposit customers. Montgomery Ward, Chicago, will raise monthly finance charges on its Illinois revolving credit accounts for sales made after June 1, to 1.8% from 1.5%. -4- (revised 4/4/80) CONSUMER LENDING POLICY CHANGES SINCE MARCH 14, 1980 No. Date Source__________.___________________ • Summary of Action__________________________ 3-21 Am Bkr. First Jersey National Corp., plans to shorten the maturity from 36 to 30 months on credit cards, which would require a cardholder to pay 1/30 of the balance instead of 1/36 . The company will not increase credit lines, and will only grant credit to existing customers. The company is cancelling the grace period for payments. All changes are to be effective in July. First Tennessee Bank is revising its monthly credit and repayment schedule to 5 percent of the unpaid balance or $10 to 8 percent or $25. National Bank of Commerce is raising minimum monthly income require ment for opening a credit card account from $600 to $800 and is barring future credit limit increases. 3-27 NYT Bankers Trust Co., New York, will limit installment loans to current depositors and existing borrowers. New lines of revolving credit— . including Checking Plus and Ready Credit accounts— will be limited to $500; previous limit was $5,000. Manufacturers Hanover Bank and Trust Co., New York, will increase unsecured loan minimum to $2,500 from $840. Maximum term of repay ment reduced to three years from four years previously. Marine Midland Bank, Buffalo, has restricted new Master Card and Visa accounts to $1,000 from $15,000 previously. New-card applicants must be customers of the bank. Maximum on unsecured loans will be $5,000 (previously $15,000) for bank customers only.. First Chicago Corp., Chicago, will no longer make unsecured loans. Beginning July 1, it will charge $20 annual fee for Visa cards. Minimum monthly payment on charge accounts raised to 5 percent from 4 percent of outstanding balance. Citicorp intends to move its credit card division to.Sioux Falls, S.D., unless New York's usury ceiling is lifted. Beginning May 1, South Dakota's usury law ceiling on credit cards will be 24 percent on balances of less than $500, and 18 percent on larger amounts. Louisiana National Bank, Baton Rouge, will charge $12 a year for Visa and Master Card, effective May 1. Officials said the $12 annual fee will be levied whether or not the customer uses the card in any month. The bank will begin charging a 4 percent fee on cash advances. 3-27 WSJ Security Pacific National Bank, Los Angeles, will freeze credit limits on Master Card and Visa accounts and limit new credit card applicants to $1,000 (from $8,000 previously). The bank will limit second trust deed borrowings to a maximum of $20,000, down from $50,000. -5- CONSUMER LENDING POLICY CHANGES SIÎÎCE MARCH 14, 1980 No. T * Date Source 3-27 Am Bkr BayBanks, Inc. Boston, plans to levy a $10 annual fee on its Visa and Master Card accounts. BayBank said it will only issue new credit cards to new or existing customers with a "something better" deposit relationship, and only if the applicant has q o similar credit card with another bank. The bank will limit new credit card extensions to $1,000. Minimum payment terms will be set uniformly for all 11 BayBanks at 5 percent; some previously had been 2 percent of outstandings monthly. New purchases will be authorized only on accounts where payments are current. The bank's plans will be effective June 1 provided all customers are notified. Massachusetts requires a 30-day notification period. 3-28 WSJ Suburban Trust Co. Hyattsville, Md., will no longer extend personal credit lines, owing to Maryland's low 12 percent rate ceiling. Sun Oil Co. will limit credit balances by applying finance charges from the date gasoline is purchased. The company will tighten screening of credit card applicants, and get tougher about collecting on past-due accounts. 3-28 Am Bkr Rainier National Bank, Seattle announced it would impose a $12 annual fee on its credit cards. The bank is cancelling 50,000 accounts of customers who pay late or are considered poor credit risks. The bank is turning down 80 percent of all new Visa applications. The bank also announced that a charge of 14 percent instead of 12 per cent would be imposed on new card charges. (Federal law permits national banks to charge 1 percentage point over the discount rate on all lending, overriding Washington's 12 percent statutory ceilings.) First National Bank, Seattle will begin to charge customers increased penalties for exceeding their credit limits and for paying late. Exceeding the limit will bring a penalty of 1 percent of the balance with a minimum $3 penalty. Late payers will be liable to a 5 percent penalty, with a $2 minimum. 3-28 Am Bkr United States National Bank, Oregon’ will begin charging a $10 a year membership fee for all personal Visa accounts and $10 on each card issued to corporate accounts. 4-3 NYT Federal Reserve Board announced 30-day notice is required for any change a creditor wishes to make in its credit card terms and that account holders could continue to repay existing debt under the old terms by making no new credit purchases on the account. Law in 17 states had provided for longer notification periods; 33 states had no provisions. The Board's uniform 30-day notice rule will expire whenever the controls program terminates. 4-3 WSJ Wash Star Sears, Roebuck announced that customers have the option of keeping the old payment schedule as long as they stop charging; Sears had earlier raised the minimum payment requirement, (see 3-26, NYT).
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